Was Piracy a Good Thing?

I’ve been thinking a lot about video game piracy and that time United Airlines beat up a guy. I’m guessing the connection isn’t that obvious, so let me explain.

Piracy as low-cost competition

There’s an argument that I take pretty seriously that runs something like this: Companies have mostly won the battle against piracy in the last few years by offering better customer service. The Forbes article I linked gave the recent high-profile release of Orange Is The New Black on torrent sites as an example. Sure, after it was released, you could get OItNB for free through the torrent sites. But it’d be annoying. Take it away, Forbes article:

Use a torrent site/client, the likes of which are often rife with viruses

Risk a letter from your ISP given the hugely high-profile nature of this leak

Download what appears to be only the first 10 episodes of the 13 episode season

In contrast, if you just wait a few weeks, Netflix will offer the full season instantly in 4K HDR, readily available on any device you own that has a Netflix app (which is probably all of them).

Sure, Netflix can’t compete on price, but it can win hands down on service. And thus many, many people will choose to pay for Netflix even though they could get this show for free. The same article added that Gabe Newell has made this point in the video game context:

The most-referenced quote about online piracy comes from Valve’s Gabe Newell, who said “Piracy is a service problem.” He created Steam, the online portal for PC games, and while it didn’t outright eliminate game piracy, it made many games so cheap and easy to access, piracy often seemed like the worse alternative.

So, if this argument is right (and I tend to think it is), piracy has basically served as low-cost, low-quality competition. By providing better customer service, paid content providers (Netflix/Steam) are able to make money selling a premium product that outcompetes the free alternative for many customers.

Does this mean piracy was good?

So hold up—does this mean that piracy had a good effect on the video game industry (/whatever Netflix is)? I think maybe, yeah.

Let’s take Netflix as an example. Netflix has some original content—more and more, these days—but it’s highly reliant on third-party content too. In a world without piracy, content providers would have a lot of leverage over Netflix. Sure, they can sell to Netflix, but they can also just sell DVDs, and they’d know that anyone who likes their show/movie/whatever has no option whatsoever but to buy their DVDs. This would make turning Netflix down a lot more appealing—which gives them a bunch more room to ask for more money. (In negotiation lingo, their BATNA was a lot higher, which gives them more leverage.)

But with piracy, they didn’t have the option to sell DVDs to nearly as many people. Remember, we’re theorizing that Netflix can outcompete piracy because it’s more convenient. But DVDs? Those are less convenient than piracy (what, drive to a store like a neanderthal?) and more expensive. Sure, that leaves the content producers with you and me—audience members too ethical to pirate their content when it’s available to buy. But it loses them a big chunk of the market that would pay for content delivered in convenient form from Netflix but who wouldn’t pay absent that convenience.

Thus, it’s plausible that Netflix was only able to get content producers on board because those producers knew that the alternative to producing a premium-convenience product was to have a much bigger piracy problem.

And the same argument applies just as much to Steam—maybe even more so. If giant publishers thought that they could get people to buy copies directly from them, they doubtless would have done so. Steam probably got a few (ok, a lot) more people to buy the game who would have gone without entirely, but I think it’s plausible that converting pirates to paying customers was a huge part of the draw for the publishers of the world getting onboard with Steam.

So maybe, just maybe, by offering a low (zero) cost alternative, piracy pushed Hollywood and the video game industry into embracing the premium convenience product in a way they wouldn’t have without piracy.

I think you mentioned something about airlines?

Ok, fine, I’m mostly onboard with the argument above. But when the whole United thing happened, I also saw a bunch of arguments that I found convincing—but that made almost the opposite point.

I assume that like most companies, United Continental Holdings Inc. cares about its passengers, at least to the extent of keeping them from switching to another airline. They don’t oversell flights because they don’t care; they oversell flights because we want them to. … Major airlines and startups have experimented with better service—more legroom and wider seats, more amenities. This meant carrying fewer passengers. It turned out people wouldn’t consistently pay those higher prices; despite heavily advertising their better amenities, the airlines in question generally ended up going out of business, or switching to the “cattle class” service we all know and hate. The market has spoken pretty loudly; it’s just that we don’t like what it’s saying.

In other words, airlines have tried to offer a premium service, but whenever they try, they go out of business. If airlines try to sell tickets at anything other than the lowest possible price, then that just won’t fly. That seems about right to me.

Let’s pause for a moment, though, to dwell on just how weird this is next to what we said about Netflix and Steam above. We said that Netflix can outcompete piracy—which is free—by offering a more convenient product. We said that Steam can get people to pay ten, twenty, sixty dollars for video games that they could get for free by offering a bit easier of an experience. And yet airlines can’t get people to pay more to avoid the overcrowding and sundry indignities of modern air travel? What’s up with that?

If, based on the airline example, you’d told me that video games came out the other way, I’d be prepared to believe you. (Assuming I didn’t know better, I mean). If you’d told me that, just an airline will go bankrupt selling a more pleasant experience, Steam would go out of business, I would have agreed. If airlines can’t get people to pay more for something they can get for a bit cheaper, why could Steam get people to pay more for something they could get for free?

I’ve given it some thought, and I think I have the answer—along with a few tempting-but-wrong answers I’ve discarded along the way. And next time, I’ll tell you what I think that answer is.

10 thoughts on “Was Piracy a Good Thing?”

a) You can’t really compare “digital” realm to material world. They operate by different rules.

b) I can’t think of any industry other than airlines with same problem. Yes, races-to-the-bottom occur from time to time, but people are willing to pay for quality and are able to support business with their money no matter where I look. Even in airlines, if you pull back enough, you’ll see people buying private jets, this is pretty much as at the top of service for money as it gets. Also, IIRC there was a time when airlines used to compete on service and service was ridiculously good compared to today standards. And I don’t think we get significantly more competition since then, so some other extrnality must be a factor.

c) Netflix and Steam don’t just offer better service, they offer it for lesser price than legal alternatives (the DVD, the theaters).And since those are more or less just some web apps, the only thing stopping enthusiasts from developing an alternative with same (or greater) level of convinience but for pirated content is cops beating on your door.

There’s a lot packed into your comment, some of which I’ll get into in the next post. A few quick thoughts:

I can’t think of any industry other than airlines with same problem. Yes, races-to-the-bottom occur from time to time, but people are willing to pay for quality and are able to support business with their money no matter where I look.

I’m not sure I agree, and I’m especially sure I don’t fully know how to make predictions about the future. To take one example off the top of my head: news. Some people say that the decline of print media has been driven by free online news—sure, something available online might not have the same quality as a heavily reported story in a magazine but it’s free. And it’s hard to compete with free. Put another way, selling news seems to be more like selling airline tickets: People aren’t that willing to pay for the premium service when they can get something similar for free. (Though I think this is an oversimplification.)

That raises the question for any given future disruption—will having a low-cost alternative mean it’s hard to compete at a higher price point, or will it mean that you can compete at a higher price with a premium product? Of course, this will depend on specific characteristics of the industry/product, but I’m hoping there are some general rules that might help us make better predictions.

Also, IIRC there was a time when airlines used to compete on service and service was ridiculously good compared to today standards. And I don’t think we get significantly more competition since then, so some other externality must be a factor.

The linked article gets into this a bit, but my understanding is that the only times airlines competed on service was when their prices were regulated. Since the government said they all had to charge the same rates, the only thing they could compete on was service. As soon as they were allowed to start competing on price, they did so.

Netflix and Steam don’t just offer better service, they offer it for lesser price than legal alternatives (the DVD, the theaters).

Do they, though? It’s hard to compare Netflix and DVDs directly, since the bundle different rights (and DVDs are available at so many different price points depending on how old they are, etc.). But with Steam, it doesn’t really seem like it wins on price for AAA games. Sure, there are sales and maybe those sales are deeper than video game sales pre-Steam (though I’m not sure; a lot of Wal-Mart type stores would sell older games for a pretty deep discount back in the 90s just to get them off the shelf). But the launch-day prices tend to be the same.

And all that’s a bit beside the point (or at least beside the point I was making). Buying songs through iTunes was cheaper than buying CDs, but at the time it wasn’t at all clear that anyone would buy from iTunes instead of pirate. And yet a lot of people did—a superior user experience beat out the lower price. And my question is how we can predict that ahead of time.

Netflix and Steam don’t just offer better service, they offer it for lesser price than legal alternatives (the DVD, the theaters).

I think Tom addressed Steam well enough, so I’ll focus on Netflix.

Even ignoring libraries, trade-in stores, buying used DVDs on Amazon or Ebay, and so on, this is only true for titles that are actually available on Netflix streaming. Netflix’s streaming movie selection is pretty limited, and while its selection of TV shows is much better, there are still some significant gaps. Non-subscription streaming services like Amazon Instant have a much wider selection, but their prices are often more expensive than renting or buying the same title on DVD/Blu-Ray (see here and here for some comparisons), again even if you ignore libraries and the used DVD market.

What services like Amazon Instant have to offer over discs is convenience and no requirements for storage space (the latter issue can be significantly improved with DVD binders and the like, but that’s a further inconvenience). In particular, as someone without cable TV, I really like the ability to watch new episodes of cable shows without ads a day after they air.

I think airlines and movies/series/games are not comparable for various reasons. First, for airline, there is no free (as in pirated) offers. Second, the airline is always a mean to an end (travel/business), whereas the game/movie is its own end. So the annoyance one has to suffer to travel by airplane are suffered for something else. Prices are also very different, by one or more orders of magnitude. The rationale between buying and pirating a game is very different than between paying cattle class and paying extra leg-room class.

(I’m mostly talking about Steam games since I’m not a Netflix user)

Anyway, I’m criticizing the choice of what is being compared to the airlines, but I think there is an interesting point to be made about airlines.

Those seem like fair points. I guess what I say in response is that you are comparing/contrasting the two industries. You pointed out two ways that airlines are different: no free alternative and it’s a means to an end.

Do you think those two differences are enough to explain the different outcome? Do you think other products that are means to an end would have the same brutal price competition that airlines face? Do you think other industries without free alternatives are more likely to face intense price competition? (Incidentally, I would have thought the reverse.)

My point is that by asking those questions, you are comparing the two industries and proposing solutions to the puzzle of why they have different outcomes when faced with low-price competition.

I just re read my comment. I think I’ll stop to try to make a point at 1:30 AM. And I’ve finished reading your next post and now think that the comparison was valid, it’s just that I focused on the wrong aspect of the problem. (and totally did not though about psychology/cognitive bias).

I’m not sure convenience=comfort. In my mind, those are two different things that will encourage different behavior. Searching for and buying plane tickets online is far more convenient than going to a brick & mortar building to do the same thing. Having three more inches of leg room is more of an abstract concept until the moment arrives that you actually have to sit in that seat. Relating to my next point, you save money up front (immediate gratification) in order to sit in a crappier seat (differed discomfort).

I also think the cost might be a big factor. Plane tickets are expensive and you typically buy them at a time when you’re planning to shell out lot of money on several other large expenses in rapid succession (hotels, local transportation, entertainment, etc.). In that sort of situation, I think cost quickly becomes the primary decision making factor.

At least you’ll probably make them exponentially better than I can. I have a bad habit of trying to be too concise and cramming two or three different concepts into a single paragraph (sometimes the same sentence). Part of what I like about your writing is the way you explore your tropics and build up to your arguments, bringing your readers along with you.